Hanna Wang

Fertility and Family Leave Policies in Germany: Optimal Policy Design in a Dynamic Framework

I develop and estimate a life-cycle discrete-choice model of fertility and female labor supply to study optimal design of a range of child-related policies. I first evaluate two recent German reforms: A change in parental leave from fixed payments to wage-contingent payments for a shorter duration and an expansion of low-cost public childcare. I find that the parental leave reform increases fertility and lowers employment rates but only among highly-educated women, whereas the childcare reform increases fertility and employment evenly across all women. Second, I solve for an optimal policy portfolio that satisfies the post-reform budget. The objectives I consider are maximizing overall fertility with utility constraints and maximizing welfare with fertility constraints. The first solution increases fixed subsidies and decreases the wage replacement rate to encourage fertility among less educated women. The second increases childcare subsidies to achieve higher employment and consumption. Both solutions cut taxes for single mothers, thereby providing insurance against divorce to married mothers. Compared to post-reform levels of fertility and welfare, substantial improvements are achieved. The first solution increases fertility by 4% and the second results in a welfare gain equivalent to 0.5% of consumption.

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